4 Steps to Maximize Your Executive Compensation
With their many moving parts, compensation plans come with many possible options and decisions. Making the right moves at the right time can mean a big difference in your bottom line.
Executive compensation plans have become increasingly complex over the past decade, with companies seeking the right balance of guaranteed vs. performance-based pay to appease both stakeholders and company leaders. Today’s compensation plans may include a combination of a base salary, annual incentives, long-term incentives, equity, benefits, severance and more.
Unfortunately, the demands of their jobs rarely allow executives the time to continually monitor and manage their accounts and make informed decisions that will maximize their pay.
As compensation structures continue to evolve, the need for executives to lean on advisers to understand their options and put a strategic plan in place will only increase. There are four fundamental elements that should be central to any planning strategy.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Recognize and manage exposure to your company
Companies want their executives invested for the long term — a holdover mindset resulting from the dot-com era, when flexible stock options encouraged tech execs to boost their company’s share price long enough to vest their personal shares.
Today, it’s common for a significant portion of an executive’s compensation package to be tied to equity or long-term performance awards. There has been a noticeable shift toward restricted stock, which distributes compensation according to a vesting plan often tied to length of time with the company or performance milestones.
Additionally, many executives will surpass holding requirements and elect to invest even further to show long-term confidence in their company. And while it is important to portray assurance in the firm’s future and leadership, it’s critical to take a step back and diversify your own portfolio. Examine your financials through the lens of key life events — marriage, retirement, children attending school — to develop a strategy that will provide both regular cash flow and an appropriate payout for retirement.
Actively monitor and manage your plan
Maintaining a clear and accurate view of your vested assets is essential for long-term planning. If your stock awards are on a vesting schedule over a five-year period, where 20% vests each year, it can be easy to take a “set it and forget it” approach. But it’s important to sit down annually to revisit how much of your stock has vested, how much is unvested, the value of that stock and the future tax consequences.
This is also a good time to evaluate where you stand in relation to any holding requirements. For example, if you are locked into a holding requirement at the time your stock vests, and are therefore unable to sell your stock to meet the tax liability of those awards, you’ll need to have a plan to cover those taxes with available cash.
Optimize your deferred compensation payout
It’s important to weigh both tax strategies and cash flow needs when determining how your deferred income should be distributed. Mapping out your anticipated income in retirement is the first step.
Take the example of an executive in his early 60s. He has significant savings and six months to go until retirement. He has been contributing to a deferred compensation plan for many years and has the option to withdraw in a lump sum, over 10 years, over 15 years, or more.
Our executive will begin receiving his required minimum distributions from his retirement account at age 70.5. Once he hits that point, his RMDs will provide ample cash flow. In order to maintain a consistent lifestyle throughout his retirement, he can bridge the gap between his income and his RMDs by distributing funds from his deferred compensation plan over the next nine years, which would provide ample cash flow.
Connect the various parts of your financial life
By working with a financial adviser with expertise in executive compensation, you can unite all components of your complex financial life. An experienced adviser will start a relationship with your company’s financial and benefits reps to ensure you can see how your entire compensation package comes together.
However, too many executives wait until they are nearing retirement to seek out an adviser. In many cases, they may make elections on the payout of their pension or retirement plan without understanding the entire picture — which impacts their cash flow, tax liability and ultimately their desired lifestyle in retirement.
By engaging a financial adviser early in their career or at least several years in advance of retirement, executives can maximize their compensation package and better plan for their future.
Grant Rawdin is Founder and CEO of Wescott Financial Advisory Group LLC. He founded the firm in 1987, which grew from the tax, business and estate services he provided to clients at Duane Morris LLP, a venerable AMLaw 100 law firm. Grant is an attorney, an accountant and a Certified Financial Planner™ and has served as adviser to many businesses, providing strategic, ongoing, and M&A advice. Grant and Wescott are recognized as leading the investment and financial planning industry in innovation, growth and size.
-
Strategies to Optimize Your Social Security Benefits
To maximize what you can collect, it’s crucial to know when you can file, how delaying filing affects your checks and the income limit if you’re still working.
By Jason “JB” Beckett Published
-
Don’t Forget to Update Beneficiaries After a Gray Divorce
Some states automatically revoke a former spouse as a beneficiary on some accounts. Waivers can be used, too. Best not to leave it up to your state, though.
By Andrew Hatherley, CDFA®, CRPC® Published
-
Strategies to Optimize Your Social Security Benefits
To maximize what you can collect, it’s crucial to know when you can file, how delaying filing affects your checks and the income limit if you’re still working.
By Jason “JB” Beckett Published
-
Don’t Forget to Update Beneficiaries After a Gray Divorce
Some states automatically revoke a former spouse as a beneficiary on some accounts. Waivers can be used, too. Best not to leave it up to your state, though.
By Andrew Hatherley, CDFA®, CRPC® Published
-
What’s the Difference Between a CPA and a Tax Planner?
CPAs do the important number crunching for tax preparation and filing, but tax planners look at the big picture and come up with tax-saving strategies.
By Joe F. Schmitz Jr., CFP®, ChFC® Published
-
Charitable Remainder Trust: The Stretch IRA Alternative
The SECURE Act killed the stretch IRA, but a properly constructed charitable remainder trust can deliver similar benefits, with some caveats.
By Brandon Mather, CFP®, CEPA, ChFEBC® Published
-
Three Ways to Take Control of Your Money During Financial Literacy Month
Budgeting, building an emergency fund and taking advantage of a multitude of workplace benefits can get you on track and keep you there.
By Craig Rubino Published
-
How Did O.J. Simpson Avoid Paying the Brown and Goldman Families?
And now that he’s died, will the families of Nicole Brown Simpson and Ron Goldman be able to collect on the 1997 civil judgment?
By John M. Goralka Published
-
What Not to Do if an Employee or Loved One Is Kidnapped
Businesses need to have a crisis plan in place so that everyone knows what to do and how to do it. Sometimes, calling the authorities isn’t recommended.
By H. Dennis Beaver, Esq. Published
-
Why You Shouldn’t Let High Interest Rates Seduce You
While increased interest rates are improving the returns on high-yield savings accounts, that may not be an effective place to park your money for the long term.
By Kelly LaVigne, J.D. Published